August 15, 2017

Difference Between What Social Security is Supposed to Cover and What People Use It For

Here's an interesting piece from USA Today which compares the percentage of retirement income the government says Social Security should provide to how much it's actually used for. The details:

Data from the Social Security Administration (SSA) shows that 61% of retired workers count on their benefits to provide at least half of their monthly income. For unmarried elderly individuals this figure jumps to 71%.

Yet according to the SSA, Social Security benefits are only truly designed to replace about 40% of the average worker's wages during retirement.

It's not surprising that people are over-relying on Social Security for retirement income. I think we've all suspected that for quite some time.

I'm actually kind of surprised a higher percentage isn't counting on it for an even greater percentage of retirement income. I would have thought something like 75% would have counted on it for at least 75% of their income.

Still, it's worrying given that we may face a cut in benefits in the next 20 years or so. Hopefully people will wake up by then, begin to save more for retirement, and go back to counting on Social Security for 40% or less of retirement income.

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I think the article is comparing two different things: income in retirement is not the same as monthly wages while working. To run an example with their numbers, suppose someone makes $100k a year, SS would provide $40k a year, replacing 40% of wages in retirement. However, living expenses in retirement could easily be $60k a year, meaning that SS would be providing 66% of monthly income.

There will never be a cut to social security payments for those who are in the situation described above. In fact there will probably be an increase eventually. One party has been desperately trying to increase the payments for those on the bottom end of the draw formula. I expect they will eventually succeed. Many people probably don't realize that social security is already designed as a partial transfer payment system from those with more to those with less because of the two bend points in the formula that determine payouts. Those on the bottom end draw out far more than they paid in. Those on the top end draw out far less than they paid in. It will be very easy to make further adjustments to that formula to give even more to the lower end and even less to the upper end of the payout spectrum.

As to cuts, that may happen but if it does I expect it to be 100% at the upper end and likely through means testing. Basically if your income is above a certain level (probably lower than you might think) your payments are reduced until they are completely eliminated if your income is too high. In that scenario, if it were to happen, those with very high levels of tax free savings will still get social security. Those with strong extra sources of income that feed their retirement lifestyle will have their social security taken away.

For those heading for that future, any opportunity where income is low enough in some years to make it cost effective to convert IRA and 401-k money to a Roth IRA would be worth considering. It would greatly assist in keeping income low for these purposes especially once required minimum distributions start to kick in.

In a way, this is already happening. I discovered that if my AGI is above $85,001, that Social Security deducts over $124.00 from my "benefit" and that continues until the following years tax returns. They look back two years, so if your AGI was $85,001 in 2014, you lose $1,488 in your 2016 "benefit" deposit. I worked and made good money for over 30 years. I would have to live to be 280 years old to ever collect what I paid into the system. However, now I feel like I get taken by the very system that I paid for. Not to mention that I still work part time as a substitute teacher (because I enjoy it) and Social Security is still deducting from that pay check too!

Actually I think that is a slightly different issue. The numbers don't quite line up with what you have listed here but if you make 85K or less you have to pay $134 per month for medicare part B premium. If you make over 85K you have to pay $187.50 per month for the same premium and it keeps going up as your income goes up. That is also something that is likely to get worse as medicare gets in more trouble.

I am guessing the numbers are a bit different because in the last year or two they had to increase these numbers quite a bit but they grandfathered in a lot of the people who were already in the system and paying a lower amount. New enrollees pay the full amount. I think that grandfathering may be scheduled to tapper off so if you look at the chart I posted you can see that the rates are going to be higher once that happens and probably just keep going higher.

Oh interesting! I didn't know that SS was designed to replace only 40% of income (I'm thankful they're at least admitting that it isn't meant to be an income replacement). I think the folly is relying on SS at all for your income. I'm not planning on SS income in my retirement, but if I do get it, it'll be a nice perk.

A lot of people know that that ought to save for their retirement but the problem is that what they earn doesn't take them home. Instead of contributing towards retirement, they service debts with the little money they earn. This situation is actually pathetic.

I'm going to try to be tactful here, as no one ever seems to win political discussion on the internet.

But to those of you who claim "I'll never collect what I paid into the system," I'd encourage you to think about what Social Security REALLY is -- a social insurance program. And like other types of insurance, sometimes you pay and you don't get anything

People who pay for car insurance for decades and don't get into an accident don't say "I never got the money I paid into my car insurance;" they're thankful they never suffered the injury/death/property loss/inconvenience that can come from an auto accident. People who pay for term life insurance to age 70 and then pass 70 don't say "hey, I never got the money I paid into my life insurance," because they're too happy that they made it past 70.

If you're not going to get back from Social Security what you paid into it, I want you to REALLY THINK about what you received from Social Security:

From the time you became eligible until the day you retired/claimed Social Security, you had disability insurance courtesy of Social Security Disability.If you were unable to work because you became disabled, Social Security disability would give you some income for the rest of your life (or at least until you became old enough for regular Social Security).

During that same time, you had Social Security survivor benefits for your kids so that if you died, they'd receive a benefit until they reached 18 (or up to 19 if attending secondary school full time).

You also had Social Security disability benefits for your kids that whole time, too -- if they became disabled at any point before the age of 22, they'd be eligible for Social Security disability for life courtesy of your eligibility.

Social Security entitles you to an annuity, essentially, with a known growth rate up to age 70 if you delay.

It provides a benefit to unworking spouses that might be higher than what they could have claimed on their own work record, and which survives your death (insofar as when you die, they get to claim on your higher amount, and not stick to the 50% spouse benefit).

Social Security protects you in divorce, provided you were married for 10 years -- if you get divorced after that, you can claim on your ex-spouse's work record, even if they got remarried, so long as you didn't remarry. (This benefit seriously helps women who see their husbands divorce them late in life, after they've raised kids and been out of the workforce -- they at least know they'll get to claim some benefits.)

There's other perks, too (a one-time death benefit of $255 for a surviving spouse, etc.)

The point is -- if you reach a point in life where you claim Social Security and have put in far more than you'll receive, that's NOT a bad thing at all. It means you were incredibly fortunate and blessed, and that for years you got the benefit of some significant insurance without ever having the misfortune of having to use it.

The prevailing conventional wisdom for most retires during there working years; was to fund tax deferred retirement accounts such as 401k's/IRA's and Annuities. With these type of accounts "income" isn't account for until is actually withdrawn and used. If a retiree saved sufficient assets while working and spends modestly in retirement, its common for their Social Security payments to represent a large portion of there income. However, this doesn't necessarily mean the retiree is overly dependent on social security. I have seen individuals with hundreds of thousand of dollars in retirement accounts, however since they only need 35k a year in income and social security is paying them 20k a year there only taking a minimal amount out of there IRA's.